Federal Register / Vol. 71, No. 188 / Thursday, September 28, 2006 / Notices 57011 

6The Commission notes that Nasdaq stated in its 

proposal that it has no reason to expect that the 

small number of non-NASD members that become 

Nasdaq members would have associated persons 

categorized as foreign associates. 

7 15 U.S.C. 78s(b)(2). 

8 17 CFR 200.30–3(a)(12). 

1 15 U.S.C. 78s(b)(1). 

2 17 CFR 240.19b–4. 

Nasdaq proposes to eliminate the 

foreign associate registration category 

under Nasdaq Rule 1100 and add an 

exemption to Nasdaq Rule 1060 for 

persons formerly covered by this 

registration category. Pursuant to 

Nasdaq’s definition of a foreign 

associate, these associated persons 

would not be conducting any securities 

activities on the Nasdaq market. The 

Commission notes that NASD Rule 1100 

requires foreign associates of NASD 

members to register with NASD. The 

Commission believes that, because 

many Nasdaq members are also 

members of NASD, requiring Nasdaq 

members to register its foreign 

associates with both self-regulatory 

organizations is duplicative.6

It is therefore ordered, pursuant to 

Section 19(b)(2) of the Act,7 that the 

proposed rule change (SR–NASDAQ–

2006–016) be, and hereby is, approved. 

For the Commission, by the Division of 

Market Regulation, pursuant to delegated 

authority.8

J. Lynn Taylor, 

Assistant Secretary. 

[FR Doc. E6–15897 Filed 9–27–06; 8:45 am] 

BILLING CODE 8010–01–P 

SECURITIES AND EXCHANGE 

COMMISSION 

[Release No. 34–54504; File No. SR–NYSE–

2006–76] 

Self-Regulatory Organizations; New 

York Stock Exchange LLC; Notice of 

Filing of Proposed Rule Change 

Relating To Exchange Rule 104.10 

(‘‘Dealings by Specialists’’) 

September 26, 2006. 

Pursuant to Section 19(b)(1) of the 

Securities Exchange Act of 1934 

(‘‘Act’’),1 and Rule 19b–4 thereunder,2

notice is hereby given that on 

September 22, 2006 the New York Stock 

Exchange LLC (‘‘NYSE’’ or ‘‘Exchange’’) 

filed with the Securities and Exchange 

Commission (‘‘Commission’’ or ‘‘SEC’’) 

the proposed rule change as described 

in Items I, II, and III below, which Items 

have been prepared by the Exchange. 

The Commission is publishing this 

notice to solicit comments on the 

proposed rule change from interested 

persons. 

I. Self-Regulatory Organization’s 

Statement of the Terms of Substance of 

the Proposed Rule Change 

The proposed rule change is an 

amendment to the specialist 

stabilization requirements set forth in 

NYSE Rule 104.10 (‘‘Dealings by 

Specialists’’). The Exchange seeks to 

implement certain changes as a pilot. 

The text of the proposed rule change is 

below. Proposed new language is in 

italics; proposed deletions are in 

[brackets]. 

Bids and Offers 

Rule 70. 

* * * * * 

* * * Supplementary Material 

* * * * * 

.20 (a)(i) With respect to orders he or 

she is representing on the Floor, a Floor 

broker may place within the Display 

Book system broker agency interest 

files at multiple price points on both 

sides of the market at or outside the 

Exchange best bid and offer with respect 

to each security trading in the 

location(s) comprising the Crowd such 

Floor broker is a part of with respect to 

orders he or she is representing on the 

Floor, except that the agency interest 

files shall not include any customer 

interest that restricts the specialist’s 

ability to be on parity pursuant to 

Exchange Rules 104.10[(6)(i)(C)] 

(5)(i)(a)(I)(d) and 108(a). 

* * * * * 

Dealings by Specialists 

Rule 104 

* * * * * 

Supplementary Material: 

Functions of Specialists 

.10 Regular specialists.—Any 

member who expects to act regularly as 

specialist in any listed stock and to 

solicit orders therein must be registered 

as a regular specialist. 

* * * * * 

(5)(i) Transactions on the Exchange by 

a specialist for [his] the specialist’s 

[own] account [of a member acting as 

specialist] are to be effected in a 

reasonable and orderly manner in 

relation to the condition of the general 

market, the market in the particular 

stock and the adequacy of the 

specialist’s position to the immediate 

and reasonably anticipated needs of the 

round-lot and the odd-lot market. 

(a) The following types of transactions 

[to establish or increase a position are 

not to be effected except] are permitted 

when they are reasonably necessary to 

render the specialist’s position adequate 

to such markets’ needs: 

(I) Neutral Transactions 

(a) Definition—A neutral transaction 

is a purchase or sale by which a 

specialist liquidates or decreases a 

position. 

(b) Neutral Transactions may be made 

without restriction as to price. 

(c) Re-Entry Obligation Following 

Neutral Transactions—The specialist’s 

obligation to maintain a fair and orderly 

market may require re-entry on the 

opposite side of the market trend after 

effecting one or more Neutral 

Transactions. Such re-entry transactions 

should be in accordance with the 

immediate and anticipated needs of the 

market. 

(d) Neutral Transactions must yield 

parity to, and may not claim precedence 

based on size over, a customer order in 

the Crowd upon the request of the 

member representing such order, where 

such request has been documented as a 

term of the order, to the extent of the 

volume of such order that has been 

included in the quote prior to the 

transaction. 

(e) The requirements contained in 

(5)(i)(a)(I)(d) above shall not apply to 

automatic executions involving the 

specialist dealer account. 

(II) Non-Conditional Transactions 

(a) Definition—A non-conditional 

transaction is a specialist’s bid or 

purchase and offer or sale, that 

establishes or increases a position, other 

than a transaction that reaches across 

the market to trade with the Exchange 

bid or offer. 

(b) Non-Conditional Transactions 

may be made without restriction as to 

price in order to: 

(i) Match another market’s better bid 

or offer price; 

(ii) Bring the price of a security into 

parity with an underlying or related 

security or asset; 

(iii) Add size to an independently 

established bid or offer on the 

Exchange; 

(iv) Purchase at the published bid 

price on the Exchange; 

(v) Sell at the published offer price on 

the Exchange; 

(vi) Purchase or sell at a price between 

the Exchange published bid and 

published offer; 

(vii) Purchase below the published bid 

or sell above the published offer on the 

Exchange; 

(c) Re-entry Obligation Following 

Non-Conditional Transactions—The 

specialist’s obligation to maintain a fair 

and orderly market may require re-entry 

on the opposite side of the market trend 

after effecting one or more NonConditional Transactions. Such re-entry 

transactions should be commensurate 

with the size of the Non-Conditional 


sroberts on PROD1PC70 with NOTICES
57012 Federal Register / Vol. 71, No. 188 / Thursday, September 28, 2006 / Notices 

Transactions and the immediate and 

anticipated needs of the market. 

(b)(I) The following types of 

transactions by a specialist for the 

specialist’s account to establish or 

increase a position are not to be effected 

except when, with the approval of a 

Floor Official, the transactions are 

reasonably necessary to render the 

specialist’s position adequate to the 

immediate and reasonably anticipated 

needs of the round-lot and the odd-lot 

market and the specialist reoffers or 

rebids where necessary after effecting 

such transaction: 

[(A)](a) A purchase at a price above 

the last trade price on the Exchange 

[sale in the same session:]; 

(b) A sale at a price below the last 

trade price on the Exchange; [(B)](c) the 

purchase of more than 50% of the stock 

offered in the market at a price equal to 

the last trade price [sale] where such 

last trade [transaction] price [would be 

on a ‘‘zero plus tic’’ (i.e., the last sale 

price] was [above the] higher than the 

last differently priced [previous 

different] regular way sale. [price); and] 

[(C) Failing to reoffer or rebid where 

necessary after effecting transactions 

described in (A) and (B) above. 

Transactions of these types, may, 

nevertheless, be effected with the 

approval of a Floor Official or in less 

active markets where they are an 

essential part of a proper course of 

dealings and where the amount of stock 

involved and the price change, if any, 

are normal in relation to the market.] 

(c) Prohibited Transactions 

(I) During the last ten minutes prior to 

the close of trading, a specialist with a 

long position in a security is prohibited 

from making a purchase in such 

security that results in a new high price 

on the Exchange for the day at the time 

of the specialist’s transaction, except as 

provided in subparagraphs 

(5)(i)(a)(II)(b)(i) through (5)(i)(a)(II)(b)(ii) 

above. 

(II) During the last ten minutes of 

trading, a specialist with a short 

position in a security is prohibited from 

making a sale in such security, 

including securities subject to the 

Regulation SHO Pilot (17 CFR 

240.202T), that results in a new low 

price on the Exchange for the day at the 

time of the specialist’s transaction, 

except as provided in subparagraphs 

(5)(i)(a)(II)(b)(i) through (5)(i)(a)(II)(b)(ii) 

above. 

(ii) [Notwithstanding the provisions of 

subparagraphs (5)(i)(A) and (B) above, 

w]Whenever a specialist effects a 

principal purchase of a specialty stock, 

in another [participating] market center 

[through ITS,] at or above the price at 

which [he] the specialist holds orders to 

sell that stock, such orders which 

remain unexecuted on the Floor must be 

filled by the specialist buying the stock 

for [his own] the specialist’s account[,] 

at the same price at which [he effected 

his] the principal transaction was 

effected;[through ITS] above unless[,] 

effecting such a principal transaction on 

the Floor[,]at that price[,]would [(a)] be 

inconsistent with the maintenance of 

fair and orderly markets[; or (b) result in 

the election of stop orders]. 

(iii) Whenever a specialist effects a 

principal sale of a specialty stock[,] in 

another [participating] market center 

[through ITS,] at or below the price at 

which [he] the specialist holds orders to 

buy that stock, such orders which 

remain unexecuted on the Floor must be 

filled by the specialist [by] selling the 

stock for [his own] the specialist’s 

account[,] at the same price at which [be 

effected his] the principal transaction 

was effected [through ITS subject to the 

same conditions as set forth in (ii)(a) 

and (b) above] unless effecting such 

principal transaction on the Floor at 

that price would be inconsistent with 

the maintenance of fair and orderly 

markets and provided further that 

effecting such a principal transaction on 

the Floor, at that price, would not be 

precluded by the short selling rules, or 

would not result in a sale to a stabilizing 

bid. 

[(iv) Notwithstanding the provisions 

of (5)(i)(A) and (B) above, a specialist 

may effect a principal purchase of a 

specialty security to establish or 

increase a position at a price above the 

last sale in the same session at a price 

that matches the then current national 

best bid or, in the case of a sale, that 

matches the then current national best 

offer displayed by another market 

center.] 

(6) Specialist Transactions in Active 

Securities that Establish or Increase the 

Specialist’s Position: 

The provisions of this rule are 

pursuant to a pilot program set to 

commence following Commission 

approval and end on June 30, 2007. 

(i) Definition—‘‘active’’ securities are: 

(a) Securities comprising the S&P 

500 Stock Index; 

(b) Securities trading on the Exchange 

during the first five trading days 

following their initial public offering of 

such securities; and 

(c) Securities that have been 

designated as ‘‘active’’ by a Floor 

Official subject to the following 

provisions: 

(I) A Floor Official may designate a 

security as ‘‘active’’ when such security 

has exhibited substantially greater than 

normal trading volume and is, in the 

Floor Official’s judgment likely to 

continue to sustain such higher volume 

during the remainder of the current 

trading session. 

(II) A Floor Official’s designation of a 

security as ‘‘active’’ shall last only for 

the trading session on the particular day 

it is determined. A new designation may 

be made on subsequent days based on 

the security’s trading characteristics 

that day. 

(III) The Floor Official shall promptly 

inform the Market Surveillance Division 

of NYSE Regulation, Inc. (‘‘MKS’’) any 

time she or he designates a security as 

‘‘active,’’ in the time and manner 

prescribed by the Exchange. 

(IV) The Floor Official designating a 

security as ‘‘active’’ and the specialist 

for such security shall prepare and 

maintain such documentation regarding 

the security as the Exchange shall from 

time to time require. 

(ii) Definition—A ‘‘Conditional 

Transaction’’ is a specialist’s 

transaction in an active security that 

establishes or increases a position and 

reaches across the market to trade as 

the contra-side to the Exchange 

published bid or offer (‘‘Hit Bid/Take 

Offer’’). 

(iii) The following Conditional 

Transactions, may be made by a 

specialist without restriction as to price, 

provided they are followed by 

appropriate re-entry on the opposite 

side of the market commensurate with 

the size of the specialist’s transaction. 

(‘‘Appropriate’’ re-entry shall mean reentry on the opposite side of the market 

at or before the price participation point 

or the ‘‘PPP’’.): 

(a) A specialist’s purchase from the 

Exchange published offer that is priced 

above the last differently-priced trade 

on the Exchange and above the last 

differently-priced published offer on the 

Exchange; and 

(b) A specialist’s sale to the Exchange 

published bid that is priced below the 

last differently-priced trade on the 

Exchange and below the last differentlypriced published bid on the Exchange. 

(iv) Re-entry Obligations for 

Conditional Transactions: 

(a) ‘‘PPPs’’—The Exchange will 

periodically issue guidelines, called 

price participation points (‘‘PPP’’), that 

identify the price at or before which a 

specialist is expected to re-enter the 

market after effecting a Conditional 

Transaction. PPPs are only minimum 

guidelines and compliance with them 

does not guarantee that a specialist is 

meeting its obligations. 

(b) Notwithstanding that a security 

may not have reached the PPP, the 

specialist may be required to re-enter 

the market immediately after a 

Conditional Transaction based on the 


sroberts on PROD1PC70 with NOTICES
Federal Register / Vol. 71, No. 188 / Thursday, September 28, 2006 / Notices 57013 

price and/or volume of the specialist’s 

trading in reference to the market in the 

security at the time of such trading. In 

such situations specialists may not rely 

on the fact that there may have been one 

or more independent trades following 

the specialist’s trading to justify a 

failure to re-enter the market. 

(c) Immediate re-entry is required 

after the following Conditional 

Transactions: 

(I) A purchase that (1) reaches across 

the market to trade with an Exchange 

published offer that is above the last 

differently priced trade on the Exchange 

and above the last differently priced 

published offer on the Exchange, (2) is 

10,000 shares or more or has a market 

value of $200,000 or more, and (3) 

exceeds 50% of the published offer size. 

(II) A sale that (1) reaches across the 

market to trade with an Exchange 

published bid that is below the last 

differently priced trade on the Exchange 

and below the last differently priced 

published bid on the Exchange, (2) is 

10,000 shares or more or has a market 

value of $200,000 or more, and (3) 

exceeds 50% of the published bid size. 

(III) Each trade at a separate price in 

a Sweep is viewed as a transaction with 

the published bid or offer for the 

purpose of subparagraphs (6)(iv)(c)(I) 

and (6)(iv)(c)(II) above. 

(v) The following Conditional 

Transactions may be made without 

restriction as to price: 

(a) A specialist’s purchase from the 

Exchange published offer that is priced 

above the last differently-priced trade 

on the Exchange or above the last 

differently-priced published offer on the 

Exchange; and 

(b) A specialist’s sale to the Exchange 

published bid that is priced below the 

last differently-priced trade on the 

Exchange or below the last differentlypriced published bid on the Exchange. 

(c) Re-entry obligations following 

transactions defined in subparagraphs 

(6)(v)(a) and (6)(v)(b) above are the same 

as for Non-Conditional Transactions 

pursuant to subparagraph (5)(i)(a)(II)(c) 

above. 

[(6)(i) Transactions on the Exchange 

by a specialist for his own account in 

liquidating or decreasing his position in 

a specialty stock are to be effected in a 

reasonable and orderly manner in 

relation to the condition of the general 

market, the market in the particular 

stock and the adequacy of the 

specialist’s positions to the immediate 

and reasonably anticipated needs of the 

round-lot and the odd-lot market and in 

this connection: 

(A) The specialist may liquidate a 

position by selling stock on a direct 

minus tick or by purchasing stock on a 

direct plus tick only if such transactions 

are reasonably necessary in relation to 

the specialist’s overall position in the 

stocks in which he is registered; and the 

specialist has obtained the prior 

approval of a Floor Official; 

(B) The specialist may liquidate a 

position by selling a security on a direct 

or zero minus tick or by purchasing a 

security on a direct or zero plus tick 

without the need to obtain Floor Official 

approval if such transaction is effected 

at a price that matches the then current 

national best bid or offer displayed by 

another market center; 

(C) The specialist should maintain a 

fair and orderly market during 

liquidation and, after reliquifying, 

should re-enter the market to offset 

imbalances between supply and 

demand. The selling of stock on a direct 

minus tick or a zero minus tick, or the 

purchasing of stock on a direct plus tick 

or a zero plus tick should be effected in 

conjunction with the specialist’s reentry in the market on the opposite side 

of the market from the liquidating 

transaction where the imbalance of 

supply and demand indicates that 

immediately succeeding transactions 

may result in a lower price (following 

the specialist’s sale of stock on a direct 

minus tick or a zero minus tick) or a 

higher price (following the specialist’s 

purchase of stock on a direct plus tick 

or a zero plus tick). During any period 

of volatile or unusual market conditions 

resulting in a significant price 

movement in the subject security, the 

specialist’s transactions in re-entering 

the market following a liquidating 

transaction effected by selling stock on 

a direct minus tick or zero minus tick, 

or purchasing stock on a direct plus tick 

or zero plus tick, should, at a minimum, 

reflect the specialist’s usual level of 

dealer participation in the subject 

security. During such periods of 

unusual price movement in a security, 

any series of such transactions which 

may be effected in a brief period of time 

should be accompanied by the 

specialist’s re-entry in the market and 

effecting transactions which reflect a 

significant degree of dealer 

participation; 

(D) Transactions by a specialist for his 

or her dealer account in liquidating or 

decreasing a position in a specialty 

security must yield parity to and may 

not claim precedence based on size over 

a customer order in the Crowd upon the 

request of the member representing such 

order, where such request has been 

documented as a term of the order, to 

the extent of the volume of such order 

that has been included in the quote 

prior to the transaction. However, this 

provision shall not apply to automatic 

executions involving the specialist 

dealer account. 

(ii) Notwithstanding the provisions of 

subparagraph (6)(i)(A) above, whenever 

a specialist effects a principal purchase 

(sale) of a specialty stock, in another 

participating market center through ITS, 

at or above (at or below) the price at 

which he holds orders to sell (buy) that 

stock, such orders which remain 

unexecuted on the Floor must be filled 

by the specialist by buying (selling) the 

stock for his own account, at the same 

price at which he effected his principal 

transaction through ITS subject to the 

same conditions as set forth in 

subparagraphs (5)(ii) and (iii) above. 

(7) The requirement to obtain Floor 

Official approval for transactions for a 

specialist’s own account contained in 

subparagraphs (5)(i)(A), (B) and (6)(i)(A) 

above shall not apply to transactions 

effected in an investment company unit 

(the ‘‘unit’’), as that term is defined in 

Section 703.16 of the Listed Company 

Manual, or a Trust Issued Receipt (the 

‘‘receipt’’) as that term is defined in 

Rule 1200. Nevertheless such 

transactions must be effected in a 

manner that is consistent with the 

maintenance of a fair and orderly 

market and with the other requirements 

of this rule and the supplementary 

material herein.] 

(7)[(8)] When inquiry is made of a 

specialist as to the price at which a 

block of stock may be sold, the 

specialist may advise the broker of the 

‘‘clean up’’ price for the block, after 

trading with the published bid (offer). If, 

as a result of this inquiry, the block is 

sold and the specialist participates as a 

dealer at the ‘‘clean up’’ price, he 

should also execute at the same price 

the executable buy orders held by him. 

The same principle applies in the event 

an inquiry is made with respect to an 

order to purchase a block of stock. 

[(9) If a specialist has limit sell orders 

on his book at two or more different 

prices, he should not, as a dealer, 

purchase all of the stock from the book 

at the lowest limit price and then 

immediately purchase stock from the 

book at a higher limit price. He should 

in such a situation withdraw the offer 

and cross the entire amount of stock he 

is purchasing as a dealer at one price. 

The same principle applies in the event 

the specialist sells stock to limit orders 

on the book at two or more different 

prices.] 

(8)[(10)] A specialist’s bid or offer in 

a specialty stock on the Exchange may 

not be inferior to the specialist’s market 

maker bid or offer disseminated by an 

electronic communications network (as 

that term is defined in Securities and 

Exchange Commission Rule 600(b)(23) 


sroberts on PROD1PC70 with NOTICES
57014 Federal Register / Vol. 71, No. 188 / Thursday, September 28, 2006 / Notices 

3The Hybrid Market was approved on March 22, 

2006. See Securities Exchange Act Release No. 

53539 (March 22, 2006), 71 FR 16353 (March 31, 

2006) (SR–NYSE–2004–05). 

4See Securities Exchange Act Release No. 51808 

(June 9, 2005), 70 FR 37496 (June 29, 2005). 

5See Securities Exchange Act Release No. 48709 

(October 28, 2003), 68 FR 62972 (November 6, 

2003). 

6Phase 3, which is scheduled to begin on or about 

October 6, 2006, will implement most of the 

provisions approved by the SEC on March 22, 2006, 

including elimination of restrictions on the 

availability of automatic executions. 

of Regulation NMS [11Ac1–1(a)(8))] or 

any other market center. A specialist 

may not disseminate a market maker bid 

or offer on another market center or 

electronic communications network at a 

price at which Exchange rules would 

preclude dissemination of such bid or 

offer on the Exchange. 

* * * * * 

Rule 123. Record of Orders 

* * * * * 

(g) Requests To Yield 

A request to a specialist to yield to a 

customer order in accordance with Rule 

104.10[(6)(i)(C)] (5)(i)(a)(I)(d) is a 

condition of that order and must be 

documented in accordance with 

applicable books and records 

requirements. 

* * * * * 

II. Self-Regulatory Organization’s 

Statement of the Purpose of, and 

Statutory Basis for, the Proposed Rule 

Change 

In its filing with the Commission, the 

NYSE included statements concerning 

the purpose of, and basis for, the 

proposed rule change and discussed any 

comments it received on the proposed 

rule change. The text of these statements 

may be examined at the places specified 

in Item IV below. The NYSE has 

prepared summaries, set forth in 

Sections A, B, and C below, of the most 

significant aspects of such statements. 

A. Self-Regulatory Organization’s 

Statement of the Purpose of, and 

Statutory Basis for, the Proposed Rule 

Change 

1. Purpose 

The NYSE Hybrid MarketSM (‘‘Hybrid 

Market’’) 3 combines the benefits of 

specialist and Floor Broker expertise 

with the speed, certainty, and 

anonymity of electronic executions to 

create a market center offering 

maximum choice to customers without 

eliminating time tested trading 

processes that have proven immensely 

successful in providing stable, liquid, 

and less volatile markets. 

Specialists will continue to perform 

their vital functions in the Hybrid 

Market’’ committing capital and adding 

liquidity in order to bridge gaps in 

supply and demand, which keeps the 

market fair and orderly, reducing 

volatility and encouraging stable prices. 

In order to keep up with the pace of 

the faster, more electronically-oriented 

Hybrid Market, specialists will use 

proprietary systems that employ 

algorithms (sometimes referred to in 

shorthand as the ‘‘specialist’s API’’) to 

generate quoting and trading messages 

that will interact with the NYSE Display 

Book system. These quoting and 

trading messages, which must comply 

with NYSE Rule 104, enable specialists 

to place proprietary interest at various 

prices at and outside the Exchange 

quotation and to interact with Exchange 

orders. 

Given the increase in the amount and 

speed of market activity which will 

occur as a result of the Hybrid Market 

and the Commission’s adoption of 

Regulation NMS 4 (‘‘Reg NMS’’), the 

Exchange believes that the stabilization 

requirements set forth in NYSE Rules 

104.10(5) and (6), governing specialist 

proprietary trading, are no longer 

responsive or relevant to the realities of 

active markets. 

Specifically, the institutionalization 

of the market, increased competition, 

and increased application of computer 

and communication technology has 

significantly diminished the time and 

place advantages of specialists. As a 

result, markets have seen increases in 

the average daily trading volume and 

the movement off the Floor of the 

decision making that affects the 

direction and extent of movements in 

the specialty stocks. There is a dramatic 

increase in the transparency of the 

Display Book through, among other 

things, Exchange initiatives like NYSE 

OPENBOOKTM. This increased 

transparency gives all market 

participants, both on and off the Floor, 

a greater ability to see and react to 

market changes. In addition, prior to the 

Hybrid Market, all orders were handled 

by the specialist. The Hybrid Market has 

reduced the situations in which 

specialists’ have the ability to see and 

interact with orders. Furthermore, in the 

Hybrid Market Floor brokers and 

customers not only have the ability to 

see limit orders above and below the 

current market price, but may also 

interact with those orders directly 

without the involvement of the 

specialist. These factors combined 

significantly reduce the time and place 

advantage enjoyed by specialists. 

Amendments to these rules are 

required to enable specialists to adapt 

more quickly and flexibly to changing 

market conditions in an environment of 

rapid quote changes and sub-second 

executions. The amendments also 

recognize that specialists have fewer 

opportunities to control the price of or 

dominate the market in a security, 

particularly liquid securities or active 

trading situations. The amendments also 

reflect the inability to use ‘‘tick’’ tests 

effectively in a fast moving market. 

Increased transparency, improved 

technology and better surveillance have 

lessened the need for a tick test. The 

Commission has already recognized that 

‘‘ * * * as trading volume increases, it 

becomes less likely that a trader would 

be able to cost-effectively manipulate 

the price of a security. Further, the high 

levels of transparency and surveillance 

for actively-traded securities on 

exchanges and other regulated markets 

make it more likely that any 

manipulation would be detected and 

pursued.’’ 5

As such, the amendments, discussed 

below, provide specialists with added 

flexibility to trade at or between the 

quote, especially when establishing or 

increasing a position. With respect to 

specialist trading with the Exchange 

quotation (‘‘hitting bids/taking offers’’), 

the proposed amendments reflect the 

view that more liberal trading ability is 

appropriate for active stocks, such as 

those comprising the S&P 500 Index, 

while for other securities, the existing 

rules should remain in effect, at least 

until the Exchange has had an ability to 

assess these rules in the context of 

Phase 3 of the Hybrid Market.6 The 

Exchange believes that the proposed 

amendments will give specialists the 

tools they require in order to meet their 

affirmative obligation to maintain a fair 

and orderly market and step in during 

moments of market volatility in the 

faster more electronic oriented Hybrid 

Market. The proposed amendments will 

benefit the investing public by offering 

yet another avenue for order execution. 

Accordingly, the Exchange proposes 

that the amendments set forth in this 

filing be approved. The Exchange 

further proposes that the amendments to 

NYSE Rule 104.10(6) be approved as a 

pilot to commence following 

Commission approval and end on June 

30, 2007. 

Current Stabilization Rules 

NYSE Rule 104.10(5) sets forth the 

specialist’s stabilization obligations 

with respect to trading as dealer in the 

stocks in which he or she is registered. 

The rule requires that the specialist’s 

trading meets the test of reasonable 


sroberts on PROD1PC70 with NOTICES
Federal Register / Vol. 71, No. 188 / Thursday, September 28, 2006 / Notices 57015 

7The Floor Official approval requirements in 

NYSE Rules 104.10(5) and (6) do not apply to 

trading in securities commonly referred to as 

exchange-traded funds or ETFs. See NYSE Rule 

104.10(7). 

8The requirements governing specialist trading 

that reaches across the market when establishing or 

increasing a position are discussed below and 

depend on whether the security in question is 

‘‘active.’’

necessity and, unless it is to render the 

specialist’s position in a stock adequate 

for current or anticipated needs of the 

market, a specialist should not effect a 

non-stabilizing transaction (i.e., a 

transaction with the trend of price 

movement) for the specialist’s account 

when acquiring or increasing a position. 

In this regard, the rule restricts 

specialists from purchasing stock at a 

price above the last sale (in the same 

trading session) and purchasing more 

than 50% of the stock offered on a ‘‘zero 

plus tick,’’ i.e. at the same price as the 

last sale, when such last sale price was 

higher than the previous, differently 

priced sale in the stock on the 

Exchange. Specialists are permitted to 

effect these types of transactions with 

Floor Official approval or in less active 

markets where they are an essential part 

of a proper course of dealings and where 

the amount of stock and price change (if 

any) are normal in relation to the 

market, provided, they reoffer or rebid 

as necessary after effecting such trades. 

NYSE Rule 104.10(6) sets forth the 

specialist’s stabilization requirements 

when liquidating or reducing a position. 

This rule provides that such trades 

should be effected in a reasonable and 

orderly manner, in relation to the 

condition of the general market, the 

market in the particular security and the 

adequacy of the specialist’s position to 

meet the immediate and anticipated 

needs of the market in the security. 

Specialists are permitted to liquidate or 

reduce a position by selling stock on a 

‘‘direct minus tick,’’ i.e. selling stock at 

a price lower than the price of the last 

sale on the Exchange or by purchasing 

stock on a ‘‘direct plus tick,’’ i.e. at a 

price higher than the price of the last 

sale on the Exchange, if such transaction 

is reasonably necessary and the 

specialist has obtained Floor Official 

approval; there are no size limitations to 

such trades. After such transactions 

(including sales on ‘‘zero minus ticks’’

and purchases on ‘‘zero plus ticks’’), 

specialists are required to re-enter the 

market on the opposite side in an 

appropriate amount, where the 

imbalance of supply and demand 

indicates that immediately succeeding 

transactions may result in lower 

(following specialist’s sale) or higher 

(following specialist’s purchase) prices.7

Amended Stabilization Rules 

The proposed changes to the 

stabilization rules retain the 

requirement that specialist dealings be 

reasonably necessary for the 

maintenance of a fair and orderly 

market and that transactions with the 

trend of the market be accompanied by 

appropriate re-entry on the opposite 

side. However, these changes move 

away from defining stabilization in 

terms of the last sale to focus on market 

conditions, the type of trade in question 

and the specialist’s existing position. 

The proposed rule defines four types 

of transactions—‘‘Neutral,’’ ‘‘NonConditional,’’ ‘‘Conditional,’’ and 

‘‘Prohibited.’’ Neutral Transactions are 

discussed in proposed NYSE Rule 

104.10(5)(i)(a)(I). The rule defines a 

Neutral transaction as a purchase or sale 

by which a specialist liquidates or 

decreases a position. Neutral 

Transactions may be made without 

restriction as to price. This is similar to 

what the current rule permits today, but 

eliminates the requirement for Floor 

Official approval in situations where the 

transaction is a sale on a direct minus 

tick or a purchase on a direct plus tick. 

This recognizes that ticks no longer 

provide useful benchmarks in a rapidly 

changing market while retaining the 

specialists’ obligation to make an 

assessment to ensure the reasonable 

necessity of such transactions. It further 

acknowledges that added flexibility is 

justified when specialists are liquidating 

or reducing a position because the 

specialists are adding liquidity to the 

market. 

Re-entry on the opposite side of the 

market is not required merely as a result 

of the specialist engaging in one or more 

Neutral Transactions, but may be 

necessary in order for the specialist to 

meet its affirmative obligation to 

maintain a fair and orderly market. 

Proposed NYSE Rule 

104.10(5)(i)(a)(II) discusses NonConditional Transactions. NonConditional Transactions are defined as 

certain specialist bids or purchases and 

offers or sales that establish or increase 

a position. Proposed NYSE Rule 

104.10(5)(i)(a)(II)(b) sets forth seven 

types of Non-Conditional Transactions 

(items (i) through (vii)). The first two 

types of Non-Conditional Transactions 

(items (i) and (ii)) are allowed without 

restriction under the current rule and 

have not been changed. Each of these 

types of transactions may be effected 

without restriction as to price or the 

need for Floor Official approval: 

(i) Match another market’s better bid 

or offer; 

(ii) Bring the price of a security into 

parity with an underlying or related 

security or asset; 

(iii) Add size to an independently 

established bid or offer on the Exchange; 

(iv) Purchase at the published bid on 

the Exchange; 

(v) Sell at the published offer on the 

Exchange; 

(vi) Purchase or sell at a price 

between the Exchange published bid 

and published offer; or 

(vii) Purchase below the published 

bid or sell above the published offer on 

the Exchange (during a ‘‘sweep’’ for 

example). 

As with Neutral Transactions, the 

amended rule reflects that in 

circumstances where the specialist is 

not reaching across the market to trade 

with the Exchange bid or offer,8 they 

should have more flexibility in the types 

of transactions they can effect, 

especially as such transactions must be 

reasonably necessary. Similarly, because 

in most of the instances, an independent 

source establishes the price of the 

allowable transactions, the concerns 

that a specialist may be ‘‘leading the 

market’’ are diminished. In these 

instances, specialists are reacting to a 

price that is established by market 

forces beyond the specialists’ control 

that is information that is readily 

available to all market participants. In 

the other instances, the specialist is 

buying at the bid price (selling at the 

offer price) or trading between the 

quotes that also do not raise significant 

concerns about price control. 

Re-entry on the opposite side of the 

market is not required as a result of the 

specialist engaging in one or more NonConditional Transactions, but may be 

required in order for the specialist to 

meet its affirmative obligation to 

maintain a fair and orderly market. 

Where such re-entry is necessary, it 

should be commensurate with the size 

of the specialist’s transactions and the 

immediate and anticipated needs of the 

market. 

Whereas the provisions related to 

Neutral and Non-Conditional 

Transactions discussed above apply to 

specialist trading in all NYSE securities, 

Conditional Transactions relate only to 

specialist transactions in ‘‘active’’

securities. 

Proposed NYSE Rule 104.10(6) 

governs Conditional Transactions. 

Proposed Rule 104.10(6)(i) defines 

‘‘active’’ securities as: 

(a) Securities comprising the S&P 

500 Stock Index; 

(b) Securities trading on the Exchange 

during the first five trading days 

following their initial public offering; 

and 


sroberts on PROD1PC70 with NOTICES
57016 Federal Register / Vol. 71, No. 188 / Thursday, September 28, 2006 / Notices 

9See proposed NYSE Rule 104.10(6)(iv)(a). 

10See proposed NYSE Rule 104.10(6)(iv)(c)(I) and 

(II). 

11Telephone conversation between Deanna 

Logan, Director, NYSE, and Jan Woo, Attorney, 

Division of Market Regulation, Commission, on 

September 25, 2006 (clarifying the section of the 

NYSE Rules that is being deleted). 

12 Id. 

13See SR–NYSE–2006–65 (filed on August 23, 

2006) including Amendment No. 1 thereto 

superseding the original filing in its entirety (filed 

on September 11, 2006). 

(c) Securities that have been 

designated as ‘‘active’’ by a Floor 

Official. 

The proposed rule further describes 

the process governing Floor Official 

designation of a security as ‘‘active.’’

The process includes, among other 

things, the Floor Official’s 

determination that the security in 

question has exhibited substantially 

greater than normal trading volume and 

is likely to continue to sustain such 

higher volume during the remainder of 

the trading session. The Floor Official’s 

determination that a security should be 

considered ‘‘active’’ lasts only for the 

trading session on the particular day it 

is determined. While the security may 

be designated ‘‘active’’ on subsequent 

days, such determinations must be 

made based on its trading characteristics 

that day. The rule also requires the 

Floor Official to notify the Market 

Surveillance Division of NYSE 

Regulation, Inc. whenever he or she 

designates a security as ‘‘active’’ and 

requires the specialist and Floor Official 

to create and maintain such 

documentation regarding the security as 

the Exchange may require. 

Conditional Transactions are defined 

as specialist trades in ‘‘active’’ securities 

that establish or increase a position by 

reaching across the market to trade with 

the Exchange published bid (in the case 

of a specialist’s sale) or offer (in the case 

of a specialist’s purchase) when such 

bid or offer (as relevant) is priced above 

the last differently-priced trade and the 

last differently-priced published bid or 

offer (as relevant) on the Exchange. 

Conditional Transactions may be 

made without restriction as to price, 

provided they are followed by 

appropriate re-entry on the opposite 

side of the market commensurate with 

the size of the specialist’s transaction. 

To help specialists to determine 

appropriate re-entry points after one or 

more Conditional Transactions, the 

Exchange will periodically issue 

guidelines, called ‘‘Price Participation 

Points’’ (‘‘PPPs’’) that identify the price 

at or before which a specialist is 

expected to re-enter the market after 

effecting one or more Conditional 

Transactions. PPPs are minimum 

guidelines only and compliance with 

them does not guarantee that a specialist 

is meeting its obligations.9

Certain situations require immediate 

re-entry after one or more Conditional 

Transactions, regardless of the PPP; that 

is, re-entry should occur as the 

specialist’s next available quoting or 

trading action. For example, immediate 

re-entry may be required based on the 

price and/or volume of the specialist’s 

Conditional Transaction(s) in reference 

to the market in the security at the time 

of such trading. The fact that there may 

have been one or more independent 

trades following the specialist’s 

Conditional Transaction does not, by 

itself, eliminate the need for immediate 

re-entry, when otherwise appropriate. In 

addition, immediate re-entry is required 

after a Conditional Transaction of: (a) 

10,000 shares or more or a quantity of 

stock with a market value of $200,000 

or more; and (b) which exceeds 50% of 

the published bid or offer size (as 

relevant).10

The Exchange believes that the 

provisions governing Conditional 

Transactions appropriately balance the 

need of specialists to have more 

flexibility in trading in fast moving 

markets with the traditional 

requirements governing their nonstabilizing trading. In addition, these 

provisions recognize that with respect to 

securities that are ‘‘active’’ as defined in 

the rule, the specialist has little 

opportunity to drive price movements 

in the security. 

Specialist transactions in ‘‘inactive’’

securities (i.e., securities that are not 

covered by the definition of ‘‘active’’

securities) that reach across the market 

to trade with the existing bid or offer 

when the specialist is establishing or 

increasing a position, continue to be 

governed by the requirements of current 

NYSE Rule 104.10(5)(i), and are 

reflected in the re-numbered NYSE Rule 

104.10(5)(i)(b)(I). Proposed NYSE Rule 

104.10(5)(i)(b)(I) reflects the current rule 

text, interpretation and practice on the 

Floor. While the Exchange believes that 

the structure of Neutral, NonConditional, Prohibited, and 

Conditional transactions is suitable for 

all securities with appropriate re-entry 

requirements, this proposed rule filing 

does not include that broad an 

amendment. The Exchange intends to 

review the trading in the inactive 

securities once Phase 3 of the Hybrid 

Market is implemented and will make 

any necessary filings related to this 

point after the completion of that 

review. 

Proposed amended NYSE Rule 

104.10(5)(i)(b)(I) now covers the 

circumstances discussed in the current 

NYSE Rule 104.10(6)(i) which is 

proposed for deletion. The Exchange is 

further proposing to delete the following 

text from NYSE Rule 104.10(5)(i)(C): 11

(C) failing to reoffer or rebid where 

necessary after effecting transactions 

described in (A) and (B) above. 

Transactions of these types, may, 

nevertheless, be effected with the 

approval of a Floor Official or in less 

active markets where they are an 

essential part of a proper course of 

dealings and where the amount of stock 

involved and the price change, if any, 

are normal in relation to the market. 

The transactions discussed in NYSE 

Rule 104.10(5)(i)(C) are by their nature, 

transactions in less active securities 

which make the discussion of less active 

markets redundant.12 Furthermore, the 

requirement that the specialist obtain 

Floor Official approval and reoffer or 

rebid where necessary are now 

incorporated in the first subparagraph of 

NYSE Rule 104.10(5)(i)(b)(I). 

In addition, the proposed rule 

amendments provide that certain 

transactions are Prohibited: During the 

last ten minutes of trading, a specialist 

with a long position in a security is 

prohibited from making a purchase in 

such security that results in a new 

Exchange high for the day at the time of 

the specialist’s transaction, and a 

specialist with a short position in a 

security is prohibited from making a 

sale in such security, including 

securities subject to the Regulation SHO 

Pilot (17 CFR 240.202T), that results in 

a new Exchange low for the day at the 

time of the specialist’s transaction. 

However, the specialist is permitted to 

effect such transaction in order to match 

another market’s better bid or offer or to 

bring the price of the security into parity 

with an underlying or related security or 

asset. This reflects the possibility that 

such trading may unnecessarily 

influence the price of a security. The 

exemptions recognize that in those 

situations, an independent party, not 

the specialist, has set the price. 

Moreover, the Exchange seeks to 

delete current section (9) of current 

NYSE Rule 104.10 because it is no 

longer applicable given the proposed 

changes to the stabilization rules as 

described above. Further, the deletion of 

section (9) is consistent with the 

proposed re-definition of a Sweep 

Transaction.13 The proposed 

amendments further make clear that 

each trade at a separate price in a Sweep 

is viewed as a transaction with the 

published bid or offer for the purposes 

of the transactions that require 


sroberts on PROD1PC70 with NOTICES
Federal Register / Vol. 71, No. 188 / Thursday, September 28, 2006 / Notices 57017 

14 15 U.S.C. 78f(b)(5). 

15 17 CFR 200.30–3(a)(12). 

1 15 U.S.C. 78s(b)(1). 

2 17 CFR 240.19b–4. 

3Amendment No. 1 (‘‘Amendment No. 1’’) 

removes all references in the proposed rule change 

that relate to clarifying who may receive payment 

for order flow funds in connection with the 

Exchange’s payment for order flow program. 

4 15 U.S.C. 78s(b)(3)(A)(ii). 

5 17 CFR 240.19b–4(f)(2). 

immediate re-entry pursuant to 

proposed NYSE Rule 

104.10(6)(iv)(c)(III). 

Lastly, conforming changes to NYSE 

Rule 104.10 have been made consistent 

with the changes noted above, including 

necessary numbering changes to certain 

provisions and certain non-substantive 

language changes. For example, current 

NYSE Rule 104.10(6)(i)(D) which 

governs the ability of the Crowd to 

prevent the specialist, when liquidating 

or decreasing a position, from trading on 

parity with the Crowd during a manual 

transaction has been re-numbered NYSE 

Rule 104.10(5)(i)(a)(I)(d). NYSE Rules 70 

and 123 have been amended to reflect 

this provision’s new rule number. 

The proposed amendments are 

intended to enhance the specialist’s 

ability to effect transactions for its 

dealer account to provide support to the 

Hybrid Market. Under the proposed rule 

change specialists will, to a greater 

degree, be able to position themselves to 

provide more liquidity against the 

market trend and thus moderate 

volatility. The proposed amendments 

provide needed flexibility for specialists 

to better adapt to the new challenges of 

the Hybrid Market. 

2. Statutory Basis 

The Exchange believes that the basis 

under the Act for this proposed rule 

change is the requirement under Section 

6(b)(5) 14 that an exchange have rules 

that are designed to promote just and 

equitable principles of trade, to foster 

cooperation and coordination with 

persons engaged in regulating, clearing, 

settling, processing information with 

respect to, and facilitating transactions 

in securities, to remove impediments to 

and perfect the mechanism of a free and 

open market and a national market 

system and, in general, to protect 

investors and the public interest. 

B. Self-Regulatory Organization’s 

Statement on Burden on Competition 

The Exchange does not believe that 

the proposed rule change will impose 

any burden on competition that is not 

necessary or appropriate in furtherance 

of the purposes of the Act. 

C. Self-Regulatory Organization’s 

Statement on Comments on the 

Proposed Rule Change Received From 

Members, Participants or Others 

The Exchange has neither solicited 

nor received written comments on the 

proposed rule change. 

III. Date of Effectiveness of the 

Proposed Rule Change and Timing for 

Commission Action 

Within 35 days of the date of 

publication of this notice in the Federal 

Register or within such longer period (i) 

as the Commission may designate up to 

90 days of such date if it finds such 

longer period to be appropriate and 

publishes its reasons for so finding or 

(ii) as to which the NYSE consents, the 

Commission will: 

(A) By order approve such proposed 

rule change, or 

(B) Institute proceedings to determine 

whether the proposed rule change 

should be disapproved. 

IV. Solicitation of Comments 

Interested persons are invited to 

submit written data, views and 

arguments concerning the foregoing, 

including whether the proposed rule 

change is consistent with the Act. 

Comments may be submitted by any of 

the following methods: 

Electronic Comments 

• Use the Commission’s Internet 

comment form (http://www.sec.gov/ 

rules/sro.shtml); or 

• Send an e-mail to rulecomments@sec.gov. Please include File 

Number SR–NYSE–2006–76 on the 

subject line. 

Paper Comments 

• Send paper comments in triplicate 

to Nancy M. Morris, Secretary, 

Securities and Exchange Commission, 

Station Place, 100 F Street, NE., 

Washington, DC 20549–1090. 

All submissions should refer to File 

Number SR–NYSE–2006–76. This file 

number should be included on the 

subject line if e-mail is used. To help the 

Commission process and review your 

comments more efficiently, please use 

only one method. The Commission will 

post all comments on the Commission’s 

Internet Web site (http://www.sec.gov/ 

rules/sro.shtml). Copies of the 

submission, all subsequent 

amendments, all written statements 

with respect to the proposed rule 

change that are filed with the 

Commission, and all written 

communications relating to the 

proposed rule change between the 

Commission and any person, other than 

those that may be withheld from the 

public in accordance with the 

provisions of 5 U.S.C. 552, will be 

available for inspection and copying in 

the Commission’s Public Reference 

Room. Copies of such filing also will be 

available for inspection and copying at 

the principal office of the NYSE. 

All comments received will be posted 

without change; the Commission does 

not edit personal identifying 

information from submissions. You 

should submit only information that 

you wish to make available publicly. All 

submissions should refer to File 

Number SR–NYSE–2006–76 and should 

be submitted on or before October 19, 

2006. 

For the Commission, by the Division of 

Market Regulation, pursuant to delegated 

authority.15

Nancy M. Morris, 

Secretary. 

[FR Doc. 06–8355 Filed 9–26–06; 10:59 am] 

BILLING CODE 8010–01–P 

SECURITIES AND EXCHANGE 

COMMISSION 

[Release No. 34–54485; File No. SR–Phlx–

2006–56] 

Self-Regulatory Organizations; 

Philadelphia Stock Exchange, Inc.; 

Notice of Filing and Immediate 

Effectiveness of Proposed Rule 

Change and Amendment No. 1 Thereto 

Relating to Amending the Summary of 

Index Option and FXI Options Charges 

and the $60,000 ‘‘Firm Related’’ Equity 

Option and Index Option Cap 

September 22, 2006. 

Pursuant to section 19(b)(1) of the 

Securities Exchange Act of 1934 

(‘‘Act’’) 1 and Rule 19b–4 thereunder,2

notice is hereby given that on August 

31, 2006, the Philadelphia Stock 

Exchange, Inc. (‘‘Phlx’’ or ‘‘Exchange’’) 

filed with the Securities and Exchange 

Commission (‘‘Commission’’) the 

proposed rule change as described in 

Items I, II, and III below, which Items 

have been prepared by the Exchange. 

On September 19, 2006, the Exchange 

submitted Amendment No. 1 to the 

proposed rule change.3 The Phlx has 

designated this proposal as one 

changing a fee imposed by the Phlx 

under section 19(b)(3)(A)(ii) of the Act 4

and Rule 19b–4(f)(2) thereunder,5 which 

renders the proposal effective upon 

filing with the Commission. The 

Commission is publishing this notice to 

solicit comments on the proposed rule 


sroberts on PROD1PC70 with NOTICES